This article is sponsored by The Wharton School.
Venture and private equity investment are important components of the portfolios of sovereign wealth funds (SWFs). However, access to these asset classes has come with hefty management fees. For SWFs, there are several advantages to direct investment in venture and private equity deals. Direct investment allows more control over the timing of actual investments. It also allows the SWFs to have more flexibility in their portfolio construction. And most importantly, there are significant savings on management and performance fees.
SWF managers need to be adept at analyzing whether their returns will beat the realized return (after fees) offered by venture capital and private equity firms. Unfortunately, ample evidence has shown that this can be very challenging for many SWFs making direct investments. The sources of these challenges vary across venture capital and private equity deals.
To date, SWFs’ investments still lag behind the performance of private equity firms. This brings us to the issue of know-how.
Venture investments often require a judgment call on the management team, because of a lack of tangible assets and reliable market data, and a paucity of concrete information about how the company will perform. Furthermore, in recent years, venture investments frequently suffer from what is known as the winner’s curse. If a deal becomes available to SWF managers, it is likely that it has already been turned down by many sophisticated venture funds. To “win” these deals may actually damage (or “curse”) an SWF portfolio.
In contrast, SWFs have relatively more access to deal flow in private equity deals. Fund managers are able to evaluate these investments at a higher level through information gathering and commercial due diligence.
To date, SWFs’ investments still lag behind the performance of private equity firms. This brings us to the issue of know-how. Is it possible for SWFs to hire the right personnel or train their staff so that they can mimic the general partners who lead private equity firms on sourcing and commercial due diligence? What are the best practices used by leading general partners when they source deals? What are the return drivers as private equity firms evaluate deals in their search for value creation?
Wharton’s new four-day executive education program for industry professionals, Private Equity: Investing and Creating Value, provides a highly focused program to address these issues. “Sovereign wealth fund managers will receive training on due diligence, how to structure a private equity deal, and how to think like private equity firms,” says Wharton Private Equity Professor Bilge Yilmaz. “This will give them an advantage when partnering or even competing with private equity firms. We hope that SWFs will see this program as a smart investment.”
“This is a unique opportunity to make an investment in your skills,” adds Yilmaz. “You will tap into the expertise of some of the top senior partners in leading investment organizations, who will not only share the latest trends, but also evaluate deals that participants put together. You will learn how they add and create value, and how the private equity business model varies as a result of regulations and market forces in different countries and regions. SWF managers in particular, as they increasingly move toward direct investments, need this kind of knowledge now.”
The Slings and Arrows of Passive Fortune
This article is sponsored by S&P DJI.
If a tale were to be written regaling us with the popular exploits of the modern day active manager in his quest for alpha across the many peaks and valleys of the financial world, passive investment would likely feature prominently in the telling. Passively managed assets have grown tremendously since their introduction in the 1970s to command some 20% of the U.S. stock’s market total-float adjusted capitalization, drawing a deluge of criticism in recent years from proponents of a more traditional, active approach who charge indexers with all manner of supposed ills – from encouraging collusive behavior and exacerbating pricing inefficiencies, to indifference on matters of corporate governance.
But are passive assets and their purveyors really the threat to markets that active management makes them out to be? Or are the problems attributed to their rise merely a reflection of the market forces all participants must face? These are the questions posed by Anu Ganti and Craig Lazzara at S&P Dow Jones Indices (S&P DJI) in their new paper, titled “The Slings and Arrows of Passive Fortune,” which seeks to unravel some of the most pervasive myths surrounding the growing role of index funds, highlight the immense value they bring to asset owners, and posits a future of asymmetric equilibrium between the old and the new that puts each in their proper place based on relative – rather than absolute – performance.
Nobody – including the paper’s authors – denies that index-based investment has made life more challenging for active managers, who count alpha as their very lifeblood; but so too would it be foolish to argue its advancement as one of the most important developments in modern financial history is without merit, or somehow Thucydidean in nature. If anything, active management can and should expect its portion of the pie (which, it must be pointed out, constitutes the majority of assets by a wide margin) to remain subject to nibbles from their passive counterparts – nibbles that may, with time, diminish. The market always has room for more players at the table, after all, and we all play by its rules.
As Director and Managing Director of index investment strategy team at S&P DJI, Ganti and Lazzara provide research and commentary on the firm’s entire product set – covering U.S. and global equities, commodities, fixed income, and economic indices. Both are chartered financial analysts and regular contributors to Indexology, S&P DJI’s appropriately named blog covering developments in the world of indexing.
Battea: 2017 Securities Class Action Industry Lookback and Observations
This article is sponsored by Battea.
There has been incredible growth in securities and antitrust class action litigations and settlements, particularly as they have unfolded in 2016 and 2017. The number of new cases and settlements from traditional securities litigation to antitrust rate rigging, spread inflation and other forms of collusion are at an all time high and shows no signs of slowing down.
With several multi-billion dollar litigations related to Libor, Euribor and Tibor rates, and spread manipulations, the securities, foreign exchange and antitrust class and collective actions litigation space rose exponentially in 2017.
View Whitepaper Here
The Future of Operations: Simplify, Innovate and Transform
This article is sponsored by Broadridge.
Now that the pain of the global financial crisis and subsequent regulations are starting to fade from view, the asset management industry is facing new challenges that will transform the business. Firms must be nimble enough to support this evolution. That means not only redesigning operations, but also adopting new technologies that can be used for innovation in-house and with the help of partners.
In active management, the industry has created more complex products to generate alpha, while the growth of passive management, spurred by fintech competition, is compressing fees. At the same time, expansion into new markets has added costs. Facing these challenges will require serious improvements to back- and middle-office operations — an overhaul of everything from data validation to trade reconciliation.
For this type of transformation, experts say, it’s not enough to improve the steps in a process. Financial institutions need to eliminate steps. Specifically, executive members of the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA) say that leading firms should:
Work collaboratively. Firms should collaborate to solve common problems; use associations to identify and promote best practices; and partner with service providers, utilities and regulators to tap their specialized skills and mutualize non-differentiating functions.
Tackle common pain points. Many of the industry’s biggest challenges come from a lack of standardized processes: Standardizing data is the top challenge and sets a foundation to accelerate change.
Leverage transformational technology. Cloud computing, artificial intelligence, and distributed ledger technology can be transformational over the coming three, five or 10 years — but investing now is vital.
Assess, accept and mitigate risks. During times of large transformational change, it should be understood that risks are higher. This traditionally risk-adverse industry must balance the need for bold change against the fear of producing subpar outcomes.
This paper asks how asset managers can move beyond incremental improvements, like shaving costs from processes like post-trade settlement, regulatory compliance and reconciliation, to reimagining how operations are handled. Based on discussions with executives from leading asset management, buy-side, and sell-side firms, as well as service providers, it assesses the drivers for change and the challenges and opportunities ahead, and discusses what actions the industry must take to reach its desired future state.
The long-term vision of how asset management operations should change is best summed up by one word: Simplify.
To learn more about “The Future of Operations” for the asset management industry, download the white paper from Broadridge and the SIFMA Asset Management Group.
To learn more about Broadridge’s solutions for the asset management industry, please visit www.broadridge.com/financial-services/asset-management/
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